There Is No Holy Grail

Let’s start by recognizing that there is absolutely no holy grail to investing or trading. Rather, we only deal in probabilities when working within non-linear markets. To that end, there are a multitude of methodologies that are utilized in the market to gain an edge in placing the greater probabilities on our side.  Yet, most of the market is primarily focused on fundamental analysis, whereas technical analysis is not viewed by most as a primary focus.

Fundamental Analysis For Prognostication

For the last 5 years, I have been writing publicly about my perspective on gold, silver and mining stocks.  And, those that have followed me know that my main thesis about being able to prognosticate the direction of the metals is based upon analyzing market sentiment. While I have not been perfect in my market calls on gold and silver (as that is not humanly possible), I think many will recognize that we have done better than most, and have been on the correct side of the market most of the time through the years, especially after we caught the highs in 2011, the last lows at the end of 2015.

I have also provided you my perspective on attempting to use fundamental analysis in the metals market, and I have cited many reasons supporting my conclusion that it simply does not work.  http://seekingalpha.com/article/4020394-sentiment-speaks-sentiment-trumps-fundamentals-news

Moreover, more and more proponents of fundamental analysis are starting to recognize its deep failures. http://bullion.directory/fundamental-analysis-has-failed/  As an additional example to the article I linked in the prior sentence, in a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF, he noted the following regarding those engaged in “fundamental” analysis for predictive purposes:

“The historical data say that they cannot succeed; financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?”

Understanding Before Forming An Opinion

Now, I would imagine someone with the credentials of Professor Douglas understands economics better than most in the world.  And, I would imagine his opinion is not only steeped in his understanding of economics, but is also based upon his extensive experience, as evidenced by his impressive credentials.  Even though you may disagree with him, you have to recognize that he clearly possesses a deep understanding of the subject matter upon which he opines.  And, if you are wondering, yes, Professor Douglas has been seduced by the “dark side of the market,” and is now a huge proponent of analyzing market sentiment to better understand the directional nature of the market.

We also have a host of fundamental analysts and authors that I have read over the last year or so, who have presented equally strong “feelings” that technical analysis does not work. http://seekingalpha.com/article/4024570-technical-analysis-work; https://www.streetwisereports.com/pub/na/why-technical-analysis-does-not-work-for-gold-and-silver

I have linked two of those articles in the last sentence.  Anyone who possesses a true understanding of technical analysis will immediately recognize that neither of the TA-bashing authors have anywhere near the depth of knowledge of technical analysis to be able to form an appropriate and informed opinion.

With Professor Douglas’s opinion, one understands there is a depth of knowledge supporting the formation of his opinion.  And, in comparison, it is clear from the articles of the two authors bashing technical analysis that neither have anywhere near the same depth of understanding about technical analysis as compared to the understanding possessed by Professor Douglass in his critical opinion on fundamentals.  In fact, I would suggest they have a very superficial understanding of technical analysis, at best, yet they felt they could provide what they erroneously deemed as “opinion.”

I think Andrew McElroy (a fellow contributor at Seeking Alpha) put it well in his response to one of the articles:

“For anyone to claim TA doesn’t work based on some guys getting some calls wrong is like saying the practice of medicine doesn’t work because your neighbor read a book on brain surgery and can’t seem to carry out a decent operation without killing someone.”

I think Andrew raises the question each and every one of us should ask about any opinion we see on the market:

How can someone even begin to opine about that which they know very little?  How reliable of an opinion do you think they are presenting with their very limited knowledge of the subject matter upon which they are attempting to opine? 

As Alexander Pope stated:

A little learning is a dangerous thing; 

drink deep, or taste not the Pierian spring: 

there shallow draughts intoxicate the brain, 

and drinking largely sobers us again.

The age of the internet has caused an explosion of knowledge available at our finger tips.  Yet, at the same time, it has caused an even greater explosion in the propagation of fallacy.  One must be able to appropriately discern between the knowledge and fallacy before coming to a conclusion.

Sadly, most in the financial markets do not engage in the depth of thought one requires to come to such a conclusion.  As Albert Einstein once said:

“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.” 

Rather, the great majority of people are too willing to accept the news of the day to sway their perspective.  Unfortunately, it is a very superficial way to approach markets as the news of the day is too fleeting a basis upon which one should draw a conclusion. Too many are willing to accept the common “market-think” when they place their money into the market, and all too often, it is based upon such superficial analysis. So, have you ever wondered why so many lose money in the market?

I will leave you with a quote from Isaac Asimov to ponder during the upcoming holiday week:

“Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won’t come in.”  

I want to wish you all a very happy and healthy upcoming Thanksgiving holiday.  Please make the effort to appreciate, enjoy and cherish every moment you have with your family, because we truly do not know how much more time we have been granted to spend with them.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.